PBOC Opens Up Capital Account for Companies in Shanghai Zone

China opened its capital account for companies and banks in the Shanghai free-trade zone, giving them unprecedented freedom to raise funds offshore.

There will no longer be a need to obtain pre-approval to raise yuan or foreign currency outside of the mainland, Zhang Xin, head of the central bank’s Shanghai branch, said at a press briefing in the city Thursday. Borrowers, including financial institutions, in the free-trade zone will be allowed to get funding equivalent to up to two times their capital, double the previous limit, he said.

The zone was set up in 2013 as a testing ground for free-market policies as China loosens control of interest rates and its currency. The deregulation will facilitate cross-border capital flows, enabling companies to obtain cheaper offshore funds directly, rather than issuing bonds or obtaining loans through their units overseas.

“This would obviously be another route for cross-border capital remittance,” said Becky Liu, Standard Chartered Plc’s Hong Kong-based strategist. “Key interested parties are likely to be banks, which had limited channels to tap offshore capital funding before. We don’t expect any immediate impact on offshore rates, but medium-term impact is that it will cap the downside of offshore rates at the onshore level.”

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Previously, companies excluding financial institutions in the zone were allowed to borrow overseas only in the yuan. Offshore loans obtained by corporates in the zone totaled 19.7 billion yuan ($3.15 billion), and the interest rate was 4.2 percent, according to a press release distributed at the conference. That compares with the one-year policy lending rate of 5.6 percent in China, and the 4.24 percent interbank offered rate in Hong Kong.

The funds raised can be used for operations, project construction in the zone and overseas, according to a statement posted on the PBOC Shanghai branch’s website Thursday.

The PBOC established a free-trade account system for lenders in the zone to separate operations that are in trial for capital-account opening from their usual work. Thirteen banks in the zone have received approval to provide free-trade accounts to clients, including two foreign-invested lenders.

China will set up three more free-trade zones in the Guangdong and Fujian provinces, and in Tianjin Municipality, according to a statement posted on the State Council’s website on Dec. 12.

The cabinet decided to expand the Shanghai zone to include the financial district of Lujiazui, and other areas in Pudong this year, the People’s Daily reported Dec. 26. It also publicized a list of measures that will be expanded nationwide after being implemented in the zone last month.